THE MONEY QUESTION:
GOLDBUGS AND GREENBACKERS DEBATE
You shall not crucify mankind upon a cross of gold.
-- William Jennings Bryan, 1896 Democratic Convention
At opposite ends of the debate over the money question in the 1890s were the "Goldbugs," led by the bankers, and the "Greenbackers," who were chiefly farmers and laborers.1 The use of the term "Goldbug" has been traced to the 1896 Presidential election, when supporters of gold money took to wearing lapel pins of small insects to show their position. The Greenbackers at the other extreme were suspicious of a money system dependent on the bankers' gold, having felt its crushing effects in their own lives. As Vernon Parrington summarized their position in the 1920s:
To allow the bankers to erect a monetary system on gold is to subject the producer to the money-broker and measure deferred payments by a yardstick that lengthens or shortens from year to year. The only safe and rational currency is a national currency based on the national credit, sponsored by the state, flexible, and controlled in the interests of the people as a whole.2
The Goldbugs countered that currency backed only by the national credit was too easily inflated by unscrupulous politicians. Gold, they insisted, was the only stable medium of exchange. They called it "sound money" or "honest money." Gold had the weight of history to recommend it, having been used as money for 5,000 years. It had to be extracted from the earth under difficult and often dangerous circumstances, and the earth had only so much of it to relinquish. The supply of it was therefore relatively fixed. The virtue of gold was that it was a rare commodity that could not be inflated by irresponsible governments out of all proportion to the supply of goods and services.
The Greenbackers responded that gold's scarcity, far from being a virtue, was actually its major drawback as a medium of exchange. Gold coins might be "honest money," but their scarcity had led governments to condone dishonest money, the sleight of hand known as "fractional reserve" banking. Governments that were barred from creating their own paper money would just borrow it from banks that created it and then demanded it back with interest. As Stephen Zarlenga notes in The Lost Science of Money:
[A]ll of the plausible sounding gold standard theory could not change or hide the fact that, in order to function, the system had to mix paper credits with gold in domestic economies. Even after this addition, the mixed gold and credit standard could not properly service the growing economies. They periodically broke down with dire domestic and international results. [In] the worst such breakdown, the Great Crash and Depression of 1929-33, . . . it was widely noted that those countries did best that left the gold standard soonest.3
The debate between these two camps still rages. However, today the Goldbugs are not the bankers but are in the money reform camp along with the Greenbackers. Both factions are opposed to the current banking system, but they disagree on how to fix it. That is one reason the modern money reform movement hasn't made much headway politically. As Machiavelli said in the sixteenth century, "He who introduces a new order of things has all those who profit from the old order as his enemies, and he has only lukewarm allies in all those who might profit from the new." Maverick reformers continue to argue among themselves, while the bankers and their hired economists march in lockstep, fortified by media they have purchased and laws they have gotten passed, using the powerful leverage of their bank-created fiat money.
Congressman Ron Paul of Texas is one of the few contemporary politicians to boldly challenge the monetary scheme in Congress. He is also a Goldbug, who argued in a February 2006 address to Congress:
It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value . . . . [A]s governments grew in power they assumed monopoly control over money. . . . [I]n time governments learned to outspend their revenues [and sought] more gold by conquering other nations. . . . When gold no longer could be obtained, their military might crumbled.
. . . Today the principles are the same, but the process is quite different. Gold no longer is the currency of the realm; paper is. The truth now is: "He who prints the money makes the rules". . . . Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system.
. . . The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value.4
Modern-day Greenbackers, while having the highest regard for Congressman Paul's valiant one-man crusade, would no doubt debate the details; and one highly debatable detail is his assertion that it is the government that now has monopoly control over money and is counterfeiting the money supply. Greenbackers might say that the government should have monopoly control over money creation, but it doesn’t. Wars are fought, not to preserve the dollars of the U.S. government but to preserve the Federal Reserve Notes of a private banking cartel; and it is this private cartel that has monopoly control over money. Moreover, its monopoly grew out of a shell game called "fractional reserve banking," which grew out of the very "gold standard" the Goldbugs seek to reinstate. We have been deluded into thinking that what is wrong with the system is that the government has a monopoly over creating the money supply. The government lost its monopoly when King George forbade the colonies from printing their own money in the eighteenth century. Banks have created most of the national money supply for most of our national history. The government itself must beg from this private cartel to get the money it needs; and it is this mounting debt to an elite class of banker-financiers, not profligate government spending on social goods, that has brought the United States and most other countries to the brink of bankruptcy. If Congress had used its Constitutional power to create money to fund its own operations, it would not have needed to pursue imperialistic foreign wars to extort money from its neighbors.
Is Gold a Stable Measure of Value?
Goldbugs maintain that the value of money needs to be pegged to something to keep it consistent and dependable. In a September 2002 statement urging Congress to abolish the Federal Reserve, Ron Paul argued:
[A]bolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation's founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true free-market economy.5
Again the Greenbacker camp might agree in part and disagree in part. They would agree that money needs to be pegged to something to keep it stable, but they would question whether the price of gold is stable enough to act as such a peg. The nineteenth century farmers knew the problem firsthand, having seen their profits shrink as the gold price went up. Real-world models are hard to come by today, but one is furnished by the real estate market in Vietnam, where sales are now undertaken in gold. When the price of gold soared to over $500 an ounce in the fall of 2005, buyers suddenly had to pay tens of millions more Vietnamese dong for a house valued at 1,000 taels of gold. As a result, the real estate market ground to a halt.6
The purpose of "money" is to tally the value of goods and services traded, facilitating commerce between buyers and sellers. If the yardstick by which value is tallied keeps stretching and shrinking itself, commerce is impaired. During the Gold Rush of the 1850s, the supply of gold shot up, and consumer prices shot up with it. From 1917 to 1920, the gold supply surged again, as gold came pouring into the country in exchange for war materials. The money supply became seriously inflated and consumer prices doubled, although the money supply was supposedly being strictly regulated by the Federal Reserve.7 During the 1970s, the value of gold soared from $40 an ounce to $800 an ounce, dropping back to a low of $255 in February 2001. If you were on a fixed income and paying your rent in gold coins that you had stashed away earlier, you would have made out well in the 1970s; but you might be paying double or triple the effective rent thereafter. Again, people on fixed incomes generally prefer a currency that has a fixed and predictable value, even if it is made of paper. Some alternatives for pegging currencies that would be more stable than the price of gold alone are discussed in Chapter 46.
Practical Limitations of Using Gold as Money
Beyond the question of price stability, there are major practical problems involved in using gold as a medium of exchange. If only gold is used, pennies, nickels and dimes will be so small that they will get lost in your wallet; while large purchases such as houses will have to be transacted in gold bars too heavy to carry in a suitcase. To be workable and efficient, the monetary system needs to be supplemented with checkbook money and electronic money; but that means exposing it to the same tampering and manipulation to which the current fiat system is subject.
There is also the problem, discussed earlier, of keeping gold coins in circulation. If the coins are stamped with a value that is the actual market value of the metal at the time the coins are produced, they are liable to get smelted for their metal as soon as its market value goes up. Coins are therefore usually issued with a face value (or nominal value) that is far in excess of their intrinsic worth.8 But that destroys the very thing the coins are supposed to be good for – preserving value.
A more serious downside of using gold as a medium of exchange is that productivity becomes tied to the availability of the metal. When gold flooded the market after a major gold discovery in the nineteenth century, there was plenty of money to hire workers, so production and employment went up. When gold was scarce, as when the bankers raised interest rates and called in loans, there was insufficient money to hire workers, so production and employment went down. But what did the availability of gold have to do with the ability of farmers to farm, of miners to mine, of builders to build? Not much. The Greenbackers argued that the work should come first. Like in the medieval tally system, the "money" would follow, as a receipt acknowledging payment. The paper money issued by the government did represent something of real value, but it wasn't gold. The Greenback was a receipt for a quantity of goods or services delivered to the government, which the bearer could then trade in the community for other goods or services of equivalent value. The receipt was simply a tally, an accounting tool for measuring value.
Goldbugs argue that there will always be enough gold in a gold-based money system to go around, because prices will naturally adjust downward so that supply matches demand.9 But we've seen that this fundamental premise of the classical "quantity theory of money" has not worked well in practice. The drawbacks of limiting the medium of exchange to precious metals were obvious as soon as the Founding Fathers decided on a precious metal standard at the Constitutional Convention, when the money supply contracted so sharply that farmers rioted in the streets in Shay's Rebellion. When gold left the country during the Great Depression, a vicious deflationary spiral was initiated in which insufficient money to pay workers led to demand falling off, which led to more goods remaining unsold, which caused even more workers to get laid off. Fruit was left to rot in the fields, because it wasn't economical to pick it and sell it.
To further clarify these points, here is a hypothetical. You are shipwrecked on a desert island . . . .
Shipwrecked with a Chest of Gold Coins
You and nine of your mates wash ashore with a treasure chest containing 100 gold coins. You decide to divide the coins and the essential tasks equally among you. Your task is making the baskets used for collecting fruit. You are new to the task and manage to turn out only ten baskets the first month. You keep one and sell the others to your friends for one coin each, using your own coins to purchase the wares of the others.
So far so good. By the second month, your baskets have worn out but you have gotten much more proficient at making them. You manage to make twenty. Your mates admire your baskets and say they would like to have two each; but alas, they have only one coin to allot to basket purchase. You must either cut your sales price in half or cut back on production. The other islanders face the same problem with their production potential. The net result is price deflation and depression. You have no incentive to increase your production, and you have no way to earn extra coins so that you can better your standard of living.
The situation gets worse over the years, as the islanders multiply but the gold coins don't. You can't afford to feed your young children on the meager income you get from your baskets. If you make more baskets, their price just gets depressed and you are left with the number of coins you had to start with. You try borrowing from a friend, but he too needs his coins and will agree only if you will agree to pay him interest. Where is this interest to come from? There are not enough coins in the community to cover this new cost.
Then, miraculously, another ship washes ashore, containing a chest with 50 more gold coins. The lone survivor from this ship agrees to lend 40 of his coins at 20 percent interest. The islanders consider this a great blessing, until the time comes to pay the debt back, when they realize there are no extra coins on the island to cover the interest. The creditor demands lifetime servitude instead. The system degenerates into debt and bankruptcy, just as the gold-based system did historically in the outside world.
Now consider another scenario . . . .
Shipwrecked with an Accountant
You and nine companions are shipwrecked on a desert island, but your ship is not blessed (or cursed) with a chest of gold coins. "No problem," says one of your mates, who happens to be an accountant. He will keep "count" of your productivity with notched wooden tallies. He assumes the general function of tally-maker and collector and distributor of wares. For this service he pays himself a fair starting wage of ten tallies a month.
Your task is again basket-weaving. The first month, you make ten baskets, keep one, and trade the rest with the accountant for nine tallies, which you use to purchase the work/product of your mates. The second month, you make twenty baskets, keep two, and request eighteen tallies from the accountant for the other baskets. This time you get your price, since the accountant has an unlimited supply of trees and can make as many tallies as needed. They have no real value in themselves and cannot become "scarce." They are just receipts, a measure of the goods and services on the market. By collecting eighteen tallies for eighteen baskets, you have kept your basket's price stable, and you now have some extra money to tuck under your straw mattress for a rainy day. You take a month off to explore the island, funding the vacation with your savings.
When you need extra tallies to build a larger house, you borrow them from the accountant, who tallies the debt with an accounting entry. You pay principal and interest on this loan by increasing your basket production and trading the additional baskets for additional tallies. Who pockets the interest? The community decides that it is not something the tally-maker is rightfully entitled to, since the credit he extended was not his own but was an asset of the community, and he is already getting paid for his labor. The interest, you decide as a group, will be used to pay for services needed by the community -- clearing roads, standing guard against wild animals, caring for those who can't work, and so forth. Rather than being siphoned off by a private lender, the interest goes back into the community, where it can be used to pay the interest on other loans.
When you and your chosen mate are fruitful and multiply, your children make additional baskets, and your family's wealth also multiplies. There is no shortage of tallies, since they are pegged to the available goods and services. They multiply along with this "real" wealth; but they don't inflate beyond real wealth, because tallies and "wealth" (goods and services) always come into existence at the same time. When you are comfortable with your level of production -- say, twenty baskets a month -- no new tallies are necessary to fund your business. The system already contains the twenty tallies needed to cover basket output. You receive them in payment for your baskets and spend them on the wares of the other islanders, keeping the tallies in circulation. The money supply is permanent but expandable, growing as needed to cover real growth in productivity and the interest due on loans. Excess growth is avoided by returning money to the community, either as interest due on loans or as a fee or tax for other services furnished to the community.
The NESARA Bill: Restoring Constitutional Money
One other proposal should be explored before leaving this chapter. Harvey Barnard of the NESARA Institute in Louisiana has suggested a way to retain the silver and gold coinage prescribed in the Constitution while providing the flexibility needed for national growth and productivity. The Constitution gives Congress the exclusive power "to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures." Under Barnard's bill, called the National Economic Stabilization and Recovery Act (NESARA), the national currency would be issued exclusively by the government and would be of three types: standard silver coins, standard gold coins, and Treasury credit-notes (Greenbacks). The Treasury notes would replace all debt-money (Federal Reserve Notes). The precious metal content of coins would be standardized as provided in the Constitution and in the Coinage Act of 1792, which make the silver dollar coin the standard unit of the domestic monetary system. To prevent coins from being smelted for their metal content, the coins would not be stamped with a face value but would just be named "silver dollars," "gold eagles," or fractions of those coins. Their values would then be left to float in relation to the Treasury credit-note and each other. Exchange rates would be published regularly and would follow global market values. Congress would not only mint coins from its own stores of gold and silver but would encourage people to bring their private stores to be minted and circulated. Other features of the bill include abolition of the Federal Reserve System, purchase by the U.S. Treasury of all outstanding capital stock of the Federal Reserve Banks, return of the national currency to the public through a newly-created U.S. Treasury Reserve System, and replacement of the federal income tax system with a 14 percent sales and use tax (exempting specified items including groceries and rents).10
The NESARA proposal might work, but the question remains, why use gold at all? If the government can issue both paper money and precious metal coins, the coins won't serve as much of a brake on inflation. So why go to the trouble of minting them, or to the inconvenience of carrying them around? The problem with the current financial scheme is not that the dollar is not redeemable in gold. It is that the whole monetary edifice is a pyramid scheme based on debt to a private banking cartel. Money created privately as multiple "loans" against a single "reserve" is fraudulent on its face, whether the "reserve" is a government bond or gold bullion.
Precious metals can preserve value in the event of economic collapse, and community currencies are viable alternative money sources when other money is not to be had. But in the happier ending to our economic fairytale, the national money supply would be salvaged before it collapses; and what is threatening to collapse the dollar today is not that it is not backed by gold. It is that 99 percent of the U.S. money supply is owed back to private lenders at interest. The result is a massive and growing federal debt, on which the interest burden alone will soon be more than the taxpayers can afford to pay. The debt is impossible to repay in the pre-Copernican world in which money is created as a debt to private banks, but the Wizard of Oz might have said we have just been looking at the matter wrong. We have allowed our money to rotate in the firmament around an elite class of financiers, when it should be rotating around the collective body of the people. When that Copernican shift is made, the water of a free-flowing money supply can transform the arid desert of debt into the green abundance envisioned by our forefathers. We can have all the abundance we need without taxes or debt. We can have it just by eliminating the financial parasite that is draining our abundance away.